INTERMEDIATE ACCOUNTING

INTERIM PERIOD EXERCISES_Borrowing Costs

EXERCISES

BORROWING COST & GOVERNMENT GRANT

MULTIPLE CHOICE PROBLEMS

1. On 1 January 2016 The Divine Company took out a 12% P10 million loan to
finance the construction of a building.
The key dates are as follows:
1 January 2016 Loan interest relating to the project starts to be incurred
1 February 2016 Technical site planning commences
1 March 2016 Expenditures on the project start to be incurred
1 April 2016 Construction work commences
1 Nov 2016 Substantially all of the activities necessary to prepare
the asset for its intended use are complete
1 Dec 2016 Building brought into use

What amount of interest should Divine capitalize for the current year?
a. P1,000,000 b. P900,000 c. P800,000 d. P700,000

2. On 1 January 2016 Imp Company borrowed P6 million at an annual interest rate

of 10% to finance the costs of building an electricity generating plant.
Construction commenced on 1 January 2016 and cost P6 million. Not all the cash
borrowed was used immediately, so interest income of P80,000 was generated by
temporarily investing some of the borrowed funds prior to use. The project was
completed on 30 November 2016. What is the carrying amount of the plant at 30
November 2016?
a. P6,000,000 b. P6,470,000 c. P6,520,000 d. P6,420,000

3. Maragondon Company had the following borrowings during 2016. The

borrowings were made for general purposes but the proceeds were used in part
to finance the construction of a new building :
Principal Interest
12% bank loan P10,000,000 P1,200,000
15% long-term loan 20,000,000 3,000,000
P30,000,000 P4,200,000

The construction began on January 1, 2016 and was completed on December 31,
2016. Expenditures on the building were made on follows:
January 1 P8,000,000
June 30 8,000,000
December 31 4,000,000

The capitalizable borrowing cost is

a. P1,680,000 b. P1,400,000 c. P4,200,000 d. P1,620,000

4. During 2016, Grant Industries, Inc. constructed a new manufacturing facility at a

cost of P12,000,000. The weighted average accumulated expenditures for 2016
were calculated to be P5,400,000. The company had the following debt
outstanding at December 31, 2016:

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  10 percent, five year note to finance construction of the manufacturing facility,
dated January 1, 2016, P3,600,000
 12 percent, 20-year bonds issued at par on April 30, 2012, P8,400,000
 8 percent, six-year note payable, dated March 1, 2015, P1,800,000.

Determine the amount of interest to be capitalized by Grant Industries for 2016.

a. P360,000 b. P563,220 c. P557,280 d. P591,840

Use the following information for the next two questions.

Lodi Department Stores, Inc., constructs its own stores. Management’s policy is to
include interest as part of the cost of new store just being completed. Additional
information follows:
Total construction expenditures
January 2, 2015 P600,000
May 1, 2015 600,000
November 1, 2015 500,000
March 1, 2016 700,000
September 1, 2016 400,000
December 31, 2016 500,000
P3,300,000
Outstanding company debt:
Mortgage related directly to new store; interest rate, 12%;
term, 5 years from beginning of construction P1,000,000
General liability:
Bonds issued just prior to construction of store; interest rate,
10% for 10 years 500,000
Bonds issued just prior to construction; interest rate , 8%,
mature in 5 years 1,000,000
Estimated cost of equity capital 14%

5. The capitalizable borrowing cost for 2015 is

a. P138,850 b. P127,250 c. P122,850 d. P250,000

6. The capitalizable borrowing cost for 2016 is

a. P255,330 b. P254,321 c. P253,938 d. P250,000

SOLUTION for question #5:

Weighted aveg. exp. 1,083,333
Specific borrowing (1,000,000)
General borrowing 83,333
x Cap. Rate 8.7%
General 7,250
Specific ( P1M x .12) 120,000
Interest on W.A. expenditures P127,250

SOLUTION for question #6:

1/1 (P1,827,250 x 12/12) P1,827,250
3/1 (P700,000 x 10/12) 583,333
9/1 (P400,000 x 4/12) 133,333
12/31 (P500,000 x 0/12) -
Weighted aveg. exp. P2,543,916

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PRISM CPA REVIEW
Specific borrowing (1,000,000)
General borrowing 1,543,916
x Cap. Rate 8.7%
General 134,321
Specific ( P1M x .12) 120,000
Interest on W.A. expenditures P254,321

MULTIPLE CHOICE PROBLEMS

1. Bren Inc. received a grant of P 60 million to compensate it for costs it incurred in
planting trees over a period of five years. Bren Inc. will incur costs in this
manner: Year 1 – P2 million; Year 2 –P4 million; Year 3 – P6 million; Year 4- P8
million; Year 5- P10 million. Based on the provisions of PAS 20, how much should
be recognized as income from government grant at the end of the year 1?
a. P60 million b. P4 million c. P12 million d. P2 million

Use the following information for the next two questions.

Nadine Company received a P 1,800,000 subsidy from the government to purchase
manufacturing equipment on January 2, 2016. The equipment has a cost of
P3,000,000, a useful life of six years, and no salvage value. Nadine depreciates the
equipment on a straight-line basis.

2. If Nadine Company chooses to account for the grant as deferred income, the
grant income to be recognized in 2016 is
a. P0 b. P300,000 c. P 500,000 d. P1,800,000

3. If Nadine chooses to account for the grant as an adjustment to the asset, the
carrying amount of the asset on the December 31, 2016 statement of financial
position is
a. P1,200,000 b. P1,000,000 c. P2,200,000 d. P2,500,000

Use the following information for the next two questions.

On January 1, 2015, Citimart Inc. was granted land in a village, located near the
slums outside the city limits, by a local government authority. The condition
attached to this grant was that the company should clean up this land and lay roads
by employing laborers from the village in which the land is located. The government
has fixed the minimum wage payable to the workers. The entire operation will take
three years and is initially estimated to cost P160 million. The fair value of this land
on the date of grant was P240 million and is expected to increase by at least 20%
annually because of the improvements to be done by the company. In relation to
the attached condition, the company incurred costs of P80 million in 2015 and P70
million in 2016. On December 31, 2016, the company estimated that it will incur
additional cost of P30 million in 2017.
4. How much should be recognized as income from government grant for the year
ended December 31, 2015?
a. P160,000,000 b. P120,000,000 c. P80,000,000 d. P70,000,000

5. How much should be recognized as income from government grant for the year
ended December 31, 2016?
a. P120,000,000 b. P150,000,000 c. P80,000,000 d. P70,000,000

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6. Lively Inc. received a consolidated grant of P120 million. Three-fourths of the
grant is to be utilized to purchase a college building for the students for
underdeveloped or developing countries. The balance of the grant is for
subsidizing the tuition costs of those student for four years from the date of
grant.

The college building, which costs P100 million, will be depreciated using the
straight-line method over 10 years. Assuming that the tuition subsidy will be
offered evenly over the period of 4 years, the amount that should be recognized
as income at the end of year 1 is
a. P12.0 million b. P10.0 million c. P17.5 million d. P16.5 million

7. Puff Company is engaged in the operation of public highways and skyways in the
Philippines. On November 2, 2015, a catastrophe devastated some of the
company operated highways and skyways. The company suffered P5.6 million
loss due to catastrophe. On January 1, 2016, the Philippine government decided
to compensate the company for the incurred loss. The government loaned P5
billion at 5% per annum with maturity period of 5 years. The present value of
cash flows at January 1, 2016 using the current market rate for similar type of
loan after considering credit risks attached was P4.2 billion. The conditions
stipulated on the loan agreement provide that the proceeds will be used for
reconstruction of the skyways and highways.

On January 1, 2016, how much should the company recognize as a government

grant?
a. Nil b. P5 million c. P4 billion d. P0.8 billion

8. A public limited company, Eks Dairy Products, produces milk on its farms. The
company has had problems during 2016. Contaminated milk was sold to
customer. As a result, milk consumption has gone down. The government
decided to compensate farmers for potential loss in revenue from sale of milk.
This fact was published in the national press on December 1, 2016. Eks received
an official letter on December 15, 2016, stating that P1 million would be paid to
it on April 3, 2017.

The entity should recognize income from government grant of

a. P1 million on December 1, 2016 c. P1 million on April 3, 2017
b. P1 million on December 15, 2016 d. P0

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